Economic Optimality of CCS Use : A Resource-Economic Model

CCS (carbon dioxide capture and storage) is an issue which has received increasing attention in the debate on climate change over the last years because of its relative technical simplicity and a large expected potential in reducing carbon dioxide emissions. The coexistence of both strong optimism and strong skepticism vis-à-vis this method, however, might suggest that while CCS could be practical under favorable geological conditions, there would be some eventual limit in CCS storage practices. The paper analyzes the optimal use of CCS by viewing CCS storage opportunities as a non-renewable resource with a limited capacity. Scarcity of CCS storage capacity should involve a shadow price which could raise CCS's effective price – this is a fair assumption given the technological assessments of CCS so far (e.g., IPCC, 2005), but no economic study has explicitly investigated this characteristic before. By using an analytical dynamic optimization model, we examine the optimal paths of CCS use, CCS's real price inclusive of the shadow price, and their difference from the operational price. A direct implication of the model is that the clarification of property rights regarding CCS underground storage sites, a corrective public scheme on CCS prices, or a combination of both would be necessary to match CCS's optimal and market prices. Also, all else equal, the shadow price of CCS makes the technology relatively less attractive than renewable energy due to CCS's reliance on scarce reservoirs and the resultant shadow value. This would serve as a justification for giving more encouragement to renewable energy in comparison to CCS